Grand Canyon Education: The Best of a Mess

by Dan Burrows | May 9, 2013 2:18 pm

Tumbling enrollments, high dropout rates and new federal regulations have made most for-profit education companies and their stocks look like dogs for years.

But a look at some of the biggest names by market capitalization shows that one for-profit education company is actually putting up handsome returns … and still looks like a comparative bargain.

Shares in Grand Canyon Education (NASDAQ:LOPE[1]) — a small, regional company with a Christian affiliation — are up 60% in the past year. On Wednesday alone, the stock jumped 14% after Grand Canyon reported first-quarter results that blew past Wall Street estimates and it gave a strong full-year outlook.

True, a big part of Wednesday’s bounce was no doubt fueled in part by a short squeeze. After all, more than 17% of Grand Canyon’s float was sold short as of April 15, the latest date for which figures are available.

The relentless run-up in LOPE shares has given Grand Canyon a market cap of about $1.3 billion, putting it behind only Apollo Group (NASDAQ:APOL[2]) and DeVry (NYSE:DV[3]) among for-profit education stocks.

Anyone holding only Apollo or DeVry has to be looking at Grand Canyon’s performance with deep green envy. After years of torrid growth and price appreciation, neither name can get any traction. DeVry is down 9% in the past 52 weeks, while Apollo has lost 47%.

More painfully, since the market bottom of March 2009, the S&P 500 is up 141%, while Grand Canyon gained 120% … but DeVry is down 36% over the same span and Apollo has sunk 73%. See the chart, data courtesy of S&P Capital IQ, below:

ed chart[4]

Grand Canyon’s unique position — its religious affiliation and concentration on business and healthcare degrees — are helping it buck the industry-wide malaise. Revenue and enrollments jumped in the most recent quarter, while Apollo and DeVry posted further erosion in both figures year-over-year. Indeed, the for-profit education industry as a whole saw enrollment decline more than 7% in 2012.

Yet, as impressive as Grand Canyon’s returns have been during the bull market, you still would have been better off just buying the S&P 500. That’s true for the past three years, and also was true for the year-to-date before Wednesday’s huge short-covering rally.

The valuation, however, remains compelling, suggesting Grand Canyon shares could extend their outperformance going forward. Even after the extended run-up, the stock still trades at steep discounts to its own five-year average by both trailing and forward earnings.

Furthermore, the stock isn’t that much more expensive than the broader market despite having much stronger growth prospects. Grand Canyon shares sport a forward price-earnings ratio (P/E) of 15 and a forecast long-term growth rate of 18%. That makes the price/earnings-to-growth ratio (PEG) stand at just 0.8. In other words, the stock isn’t rising nearly as fast as its growth trajectory.

The S&P 500 looks downright pricey by comparison. It has a forward P/E of 14 and a long-term growth forecast of only about 9%, making its PEG stand at 1.8, according to data from Thomson Reuters Stock Reports.

I’m no fan of for-profit education stocks — not with enrollments plunging, defaults rising and regulators poking around. But based on fundamentals and valuation, Grand Canyon looks to be the best of a bad lot among the larger cap names.

As of this writing, Dan Burrows didn’t hold positions in any of the aforementioned securities.

  1. LOPE:
  2. APOL:
  3. DV:
  4. [Image]:

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